Director Dividends – When do they become unlawful?
If you have taken your accountants advice and pay yourself and other directors of your limited company a small basic salary plus dividends, you will already know that it is an efficient tax planning strategy.
Have you been paid Illegal dividends?
It is common place for company directors to pay themselves this way. And indeed, your accountant has told you that this is best practice. Indeed it is until a company starts having cash flow issues but you still continue to pay/receive monthly dividends. HMRC call these dividends illegal dividends.
Dividends are not like a salary as they are paid out of a company’s post-tax profits. So, if you are a director or a shareholder and you receive dividends you must ensure the company has sufficient profits to do so.
Illegal dividends are repayable to the company if you can’t prove the correct procedures have been followed.
The correct dividend Procedure
- Profits must be made before a company pays out any dividends
- Meeting of directors held
- Board minutes and dividend vouchers produced
If there are no post profits ensure all payments to directors are by way of salary.
What should I do if my company is struggling financially?
If your company is in financial distress and is found insolvent, you should seek professional guidance as soon as you can. Situations like this could lead to your own bankruptcy if you cannot pay back money received by way of illegal dividend.